Haven't Filled Your 2020 Taxes Yet? Don’t Stress! You Still Have Time!
There’s still time to figure out and file your taxes! You have a month to get things together and make some moves. The federal (and most states) deadline to file your individual tax return has been extended to May 17th, 2021.
So what does this mean and what can you do now?
As a business owner, there is a lot you can do to control your tax outcome. But, with that control (power) there is responsibility! As a business owner, you now have the responsibility to understand, create, and execute a strategy that allows you to legally minimize your taxes.
On the other hand, if you are someone else’s employee, you have very little (or no) control over your tax strategy. Employment taxation laws dictate what and how much you will pay in taxes throughout the year.
I had a talk this morning with a friend and colleague about this very issue. There is a world of difference between taxation for business owners vs. employees. It is a totally different game. You’ve got to know the rules. So, this email is for my business owners out there! I am going to shed some light on this and hopefully relieve some of your stress.
Now (at tax time) and even throughout the year, the best thing you can do is Know Your Numbers! Honestly, this is the single most important move you can make which will help your tax preparer tremendously (even if you prepare your own taxes)!
Taxes for Business Owners
All business owners should have a STRATEGY of how they take and report income and expenses, and a PLAN and PROCESS to track and monitor that strategy. We will cover that in a future AMA Weekly Strategy Session, but for now I want to focus on the most pressing topic which is what you must know NOW for your taxes, as follows:
YOUR TAXABLE INCOME: How much cash was deposited into all of your bank accounts last year? You must be able to CLEARLY separate income from other types of deposits. Remember: loans (received or paid back) are NOT income so be sure not to include this in your taxable income.
You also need to gather every tax document you received with income reported (1099’s, K-1’s, etc) and make sure you can reconcile the income reported with what was deposited into your accounts. The IRS LOVES going after “unreported income” so make sure you can explain every deposit.YOUR BUSINESS EXPENSES: You should go through every dollar that you spent last year (via bank accounts, credit cards, etc) and separate them into clear categories (travel, internet, office expenses, rent, etc). If you have taken my Quickbooks Online Master Course and setup your system, this takes just minutes a day and is always ready to go. You may not know which expenses are deductible for your business - no problem. Just present CLEAR data and your tax preparer can take it from there. Trust me, this is priceless and is well worth the time and effort.
As with income, you may also have tax documents with expenses you can deduct as well (form 1098, etc). Be sure to gather these documents and claim those deductions on your return.TAXES PAID (QUARTERLY ESTIMATES): This is a topic that causes a lot of confusion (and stress 😫). Here’s the deal, as a business owner you are responsible for paying taxes on your own and in advance (usually quarterly), based upon your net income. This is totally different from paying taxes as an employee, which is based upon gross income, and is paid on your behalf by your employer.
Many employees are excited when they get a tax refund at the end of the year, and business owners are bummed because typically they have to pay. The actual taxes may be about the same, but as an employee, if you get a refund, it just means that you paid in too much during the year and gave the IRS interest-free use of your money. As a business owner, you are in control and your goal is to pay just enough taxes to break even at year end (e.g., no refund or tax due).
This does take some planning and review of your numbers throughout the year. In the meantime you can avoid an “underpayment penalty” in most cases by paying 100% of your previous years’ tax liability in advance for the current year.
The deadline to make the first quarterly payment for 2021 was yesterday, April 15th. If you did not pay it, don’t worry, just do so as soon as you can. The next deadline is June 15th for individuals.
A Little Note About Extensions
Ok - this is another point that causes a lot of confusion! If, for some reason, you cannot file your taxes by May 17th, you can file an extension which will give you until October 15th for individual returns. NOTE: This is an extension of time to FILE, not to PAY. You must still pay in what you expect to owe by May 17th, 2021 for 2020 to avoid penalties and interest. You can have more time to get your paperwork together and file the final return by October 15th, but your payment must be made on or before May 17th.
See? It still comes back to Knowing Your Numbers! Do this on a regular basis and tax time may never be fun, but it will be MUCH LESS stressful!
I hope this helps! We will be covering “Tax Strategies for Business Owners” in upcoming AMA Weekly Strategy with Q+A Sessions, so join now to learn! You will be amazed at what a good, clear strategy will do for you, your business and your taxes.